Advantages of Fixed-Indexed Annuities over Mutual Funds.	back to home

Fixed-Indexed Annuities offer advantages over mutual funds in terms of both safety and costs. Consumers need to know the truth, that fixed-indexed annuities have no loads, fees, or charges, and they keep your money safe, preventing you from experiencing losses in your retirement savings. Fixed-Indexed annuities are savings vehicles, with guarantees of principal and interest, they are not securities. Fixed-Indexed Annuities allow savers to participate in the positive movement of the S&P 500 stock market index, and lock-in annual market gains, but never market losses! Mutual funds cannot make this claim. If you are willing to accept moderation, meaning a cap on upside earnings, then such moderation comes complete with safety of principal, plus all of your annual gains are locked-in and yours to keep! Fixed-Indexed Annuities may offer the moderation you need.

Consumers need to take the time to investigate fixed-indexed annuities, and when they do, they will find them to be a logical alternative to market sensitive investments. In an effort to highlight the advantages of fixed-indexed annuities over mutual funds, we would like to share some information with you, which will enable you to see your retirement savings and investment choices with more clarity.

You will find objective information:

• Views from Warren Buffett taken from an interview with Fortune Magazine (March 6th, 2006)
• Views from John C. Bogle, founder and former chairman of the Vanguard Group, taken from Bogle Financial Research Center (January 14 2003)
• Views from Gary Unsler, Gary is a past Under Secretary to the Treasurer, and is an author providing eye opening information on the cost related to mutual funds.

These pieces provide third party, objective information, that will enlighten consumers as to both the disclosed and the undisclosed costs associated with mutual funds. Once one realizes all of the costs and risks associated with today's mutual funds, we believe it becomes increasingly difficult for the average consumer to see mutual funds as a cost efficient investment, in which to place retirement savings. American Annuity Advocates believes the following material will help people, providing information which is often never made available to the average consumer. The information which we are disclosing will assist the average consumer gain the clarity necessary to make good financial decisions regarding one's retirement savings options.

Why does American Annuity Advocates want to give you information surrounding the costs involved with the mutual fund industry? In order to make good financial decisions about your retirement savings, you need to be aware of the costs and the risk associated with investing your retirement savings. Consumers must understand the risk and the cost associated with the various savings and investment products on the spectrum of risk and return.

• American Annuity Advocates, as the name implies, advocates the use of tax-deferred fixed annuities, which are savings vehicles, (meaning they are not market sensitive), because they protect your principal, your interest, and your ability to withdraw income when you need it.
• Mutual funds are purely investment products. They do not protect your principal, your interest, or your ability to withdraw income when you need it.
• When you invest in the stock market by placing your nest egg in mutual funds, you can lose your money. The following third party information should keep you well informed, and heighten your awareness, as to the safe alternatives to market sensitive investments.

a) Excerpts, Warren Buffett, Fortune Magazine, March 6, 2006, with comments in italics.

Warren Buffett, Chairman of Berkshire Hathaway and considered by many to be one of the most influential heads of industry in modern American history, had this to say in an interview with Forbes Magazine. "Over the century, American business did extraordinarily well and investors rode the wave of their prosperity. Businesses continue to do well. But now shareholders, through a series of self-inflicted wounds, are in a major way cutting the returns they will realize from their investments, (expenses).

"'The most that owners in aggregate can earn between now and Judgment Day is what their businesses in aggregate earn",(less expenses). "True, by "buying and selling that is clever or lucky, investor A may take more than his share of the pie at the expense of investor B. And, yes, all investors feel richer when stocks soar. But an owner can exit only by having someone take his place. If one investor sells high, another must buy high. Indeed owners must earn less than their businesses earn because of "frictional" cost, (expenses). And that's my point: These costs are now being incurred in amounts that will cause shareholders to earn far less than they have historically."

It is the opinion of American Annuity Advocates, that many who study the market today are concerned about the portion of earnings that would have gone to the consumer, but now go to the mutual fund industry in the form of handling fees. These expenses make it extremely difficult to squeak out a net profit as the "average Joe". If the market were to increase 24% in a year, one would not mind paying 2%, 3%, or 4% in expenses. If the market is returning 7% and your expenses are 3.5%, you keep only 3.5%, yet you assumed significant risk of loss. If the markets were to go down 10% in a given year, and you were to tack on expenses for management of your investment of 3%, your account is down a total of 13%.

American Annuity Advocates wants to give you some perspective by presenting you with a hypothetical situation. Let's pretend you have two sums of money, one savings instrument providing a fixed guaranteed return of 5%, and another market sensitive investment tied to the stock market which lost 10% in year #1, and your market sensitive investment has costs/fees of 3%. What would your market sensitive investment have to return in year two just to get back to $100,000? The answer; you would need a 17.94% return in year two, because after your 13% net loss (10% plus 3% in fees), in year 1, your investment is worth only $87,00, and with a 17.94% return in the market, less fees of 3%, you would net 14.94%, which would bring your market sensitive investment back up to $100,000.

What return would you need in year three, just to keep up with your 5% fixed guaranteed savings instrument? The answer; in order to keep pace with the fixed instrument which guaranteed a 5% interest rate, which in three years has grown to $115,762, your market sensitive investment would require a market return of 18.76%. Which if you take into account 3% in fees, you would net 15.76%. This is the net return required to catch up to the savings instrument, so both now equal $115,762!

I hope the previous example was clear to you. People often fail to realize that once a negative return is realized, and you are working with a lower account value, that you require a far greater return the next year just to get back up to previous account value. When was the last time you stopped to think about returns necessary to recover from market losses?

Consumers simply cannot continue to accept the risk of loss and simultaneously pay high expenses in a period where market returns may indeed average 7% for some time. The mutual fund industry, when investing other people's money, makes their money and collects their fees, regardless of whether or not you win or lose. Does this not sound like the casinos who always have the house odds in their favor? Mutual funds don't seem to be much different. No matter what happens, the mutual fund industry reaps outrageous profits at the expense of many who cannot afford to gamble, especially when it comes to retirement savings.

*To read the entire article by warren Buffett please click here.

b) Excerpts, taken from "The Mutual Fund Industry in 2003: Back to the Future, John Bogle, Financial Markets Research Center, with comments in italics.

John Bogle founder and former chairman of the Vanguard Group is a veteran of the mutual fund industry. His research on the mutual fund industry is insightful. If anyone wanted to learn about the true inner workings of the mutual fund industry, it would be close to impossible to find someone who knows more on the subject. In reading his work, one may conclude that John Bogle is both a fan and a critic of the industry he has helped to grow.

So what does John Bogle have to say, and how does it affect you and me? We believe you will simply be better prepared to make informed choices about your retirement savings options. You will know why the various cost, those specified and those hidden have consumers and industry analysts so concerned. Previously, Warren Buffet pointed to the costs associated with investing today. John Bogle notes costs and industry character issues, aggressive marketing, and poor timing on the part of consumers.

How would the average mutual fund investor have faired in recent years? Here is what John Bogle had to say...

"It is the increase in costs, largely alone, that has led to that substantial reduction in the share of the stock market's return that the average fund has earned. But it is the change in the industry's character that has caused the average fund shareholder to earn far less than the average fund. Why? First, because shareholders have paid a heavy timing penalty, investing too little of their savings in equity funds when stocks represented good values during the 1980s and early 1990s. Then, enticed by the great bull market and the wiles of mutual fund marketers as the bull market neared its peak, they invested too much of their savings. Second, because they have paid a selection penalty, pouring money into "new economy" stocks and withdrawing it from "old economy" stocks during the bubble, at what proved to be precisely the wrong moment."

"The result of these two penalties: While the stock market provided an annual return of 13% during the past 20 years,(1982-2002), and the average equity fund earned an annual return of 10%, the average fund investor, according to recent estimates, earned just 2% per year."

• "From 1951-1971, the annual rate of return of the average equity fund was 10.5%, compared to 12.1% for Standard & Poor's 500 Stock Corporate Index, a shortfall of 1.6 percentage points, doubtless largely accounted for by the then-moderate costs of fund ownership at the time. The average fund delivered 87% of the market's annual return." (In the period from (1951-1971).
• "From 1982-2002, the annual rate of return of the average equity fund was 10.0%, compared to 13.1% for the S&P 500 Index, a shortfall of 3.1 percentage points, largely accounted for by the now-far-higher levels of fund operating and transaction costs. The average fund delivered just 76% of the market's annual return during this time period."

American Annuity Advocates points to this decrease in the average fund performance, from delivering 87% of the market's return from 1951-1971, to 76% of the market's return from 1982-2002, as a stark indicator of the increase in mutual fund handling fees. These handling fees hurt investor returns. Over time industries tend to gain efficiencies, they lower cost and they lower handling fees. The mutual fund industry appears to have done the exact opposite; increasing fees, lowering industry efficiencies, and hurting investor returns.

Retirement minded individuals must assess their individual situations, and ask themselves whether or not they can afford to risk their nest egg in the stock market. Does it make sense to risk savings that one cannot afford to lose? When you are approaching retirement or while you are in retirement, you may not be able to afford negative returns. While in retirement you do not have the time horizon of a younger investor. You may not have the time to recover from market losses. Click here view the complete text

Source The Mutual Fund Industry in 2003:Back to the Future
Remarks by John C. Bogle Founder and Former Chairman, The Vanguard Group
Before the Harvard Club of Boston, the Harvard Business School Association of Boston, and the Boston Security Analysts Society
Boston, Massachusetts January 14, 2003.

c) Pursuant to our conversation on mutual funds, are the following excerpts taken from "Testimony on Mutual Funds before the subcommittee on Capital Markets, Insurance and Government, Sponsored Enterprises Committee on Financial Services United States House of Representatives March 12, 2003", by Gary Gunsler.

Gary was the Under Secretary to the Treasurer, and is an author who provides eye opening Information on the cost related to mutual funds. This objective examination of the mutual fund industry and the associated costs force all parties to question who is making money in the mutual fund industry.

"Few issues before this committee touch so many Americans as those related to mutual funds. Millions of Americans invest in the stock or bond market to help achieve their long-term financial goals - a home, a college education for their children, a secure retirement. About half use mutual funds. Mutual funds are a convenient and potentially efficient investment vehicle for small investors. And yet, mutual fund companies run up approximately $70 billion per year in costs for their investors. With the dramatic declines in the stock market three years in a row, and with so many mutual funds failing to match the market's performance, investors may rightly wonder if all those fees and costs have been well spent."

According to all of the information available today, one thing is certain; the mutual fund companies and the fund managers they contract are making money regardless of the markets direction. Consumers only make money after all costs, fees, loads, bid-ask spreads, and marketing materials are distributed.

Gary Unsler goes on in his testimony to talk about "Those Ankle Weights - Costs"

"Like most choices, however, financial choices are relative: one choice can be judged only in comparison with those forsaken. Indeed, by many objective measures, actively managed mutual funds are failing their millions of devoted clients. That's understandable, given that the mutual fund companies impose costs on investors of approximately $70 billion annually. Most of this money - $50 billion per year -- goes directly to the fund companies in the form of management fees and sales loads. The rest-- largely made up of portfolio trading costs- is paid to the brokerage industry, which happily executes the huge trading volume generated by active fund managers."

Gary speaks of costs that simply are not discussed in there entirety, in other words, have you ever discussed costs beyond the stated fees and expenses on one's account statements. Gary goes on to state the following; "Ask most people about their mutual funds and they may have some vague notion that the fund charges an annual management fee. Yet that is only the beginning of the costs that one pays with a mutual fund manager actively investing for you."

"In total, investors can expect costs totaling close to 3 percent to disappear each year for an actively managed stock fund. Invest in a fund with sales loads, as close to one out of two investors do, then one can expect costs averaging closer to 4 percent per year."

Gary, in his testimony, breaks costs down as follows;

Some mutual fund costs are disclosed to investors:

• Monthly management, administrative, and distribution fees averaging over 1 percent per year. A review of the 2,207 actively managed stock funds in the Morningstar database shows an average expense ratio of 1.44 percent.
• Sales loads charged by half of all actively managed mutual funds to buy or sell shares. The average load is 4.1 percent.ii With an average holding period of less than three years, the average load fund investor can pay an additional 1.4 percent per year. Loads don't even help to offset other costs. Expense ratios for such load funds also are high, with an average of 1.84 percent. And as a group, load funds actually earn lower average returns than no- load funds, even without taking the load into account.
  
  "While investors may not pay particular attention to these costs, at least they are disclosed."
  
  There also are very important other costs, though, that go undisclosed. These undisclosed costs are hard for investors to measure and they do not show up on any statement. Yet all of these costs stand between investors and the returns they desire:
• Portfolio trading costs - the typical active fund manager turns over their entire portfolio once every 15 to 16 months, incurring brokerage costs and bid-ask spreads each year of approximately 0.5-1.0 percent of assets.
• The opportunity cost of holding idle cash, about 0.5 percent of assets each year during the 1990s bull market, though less now.
• Excess capital gains taxes incurred as the portfolio is turned over each year. Active fund investors, by definition forsaking a buy and hold strategy, burden taxable investors with short term capital gains taxes estimated to add costs of 1 to 2 percent of assets per year.
  
  American Annuity Advocates thinks the previous excerpts taken from Gary Unsler's "Testimony on Mutual Funds before the subcommittee on Capital Markets, Insurance and Government, Sponsored Enterprises Committee on Financial Services United States House of Representatives March 12, 200, provides perspective consumers seldom, if ever, hear about.

Click Here *For the Complete Testimony on Mutual Funds before the subcommittee on Capital Markets, Insurance and Government, Sponsored Enterprises Committee on Financial Services United States House of Representatives March 12, 2003.

Summary: The facts regarding fixed-indexed annuities, as they relate to mutual funds.

As consumers take the time to investigate fixed-indexed annuities, they will undoubtedly come across some advisors who argue; "that because Fixed-Indexed Annuities don't include reinvested dividends, there are better investments with dividends", and hence they don't recommend them for their clients. This is a shame, because what they don't understand is that they do not include negative market returns either!

• When we talk about participating in the upside potential of the Index, the S&P 500, yet not participating in market losses, we speak only of the fact that your annuity is linked to the numerical value of the Index.
• Because your interest gains are linked to the index, you do not own the stocks in the Index, and hence you don't receive dividends.
• Since you don't own any stocks, nor do you own a mutual fund made up of individual stocks, you don't pay a fund manager, hence there are no costs, fees, spreads, or other expenses, and no risk of market losses.
• The calculations of fixed-indexed annuity returns using an annual reset methodology do not include reinvested dividends, but neither do they include years with negative returns.
• Because an annual reset index annuity doesn't participate in market losses it turns those years of stock market losses into years of zero gains.
• If you go back over the past 40, 50, 60, 70 years of the market and replace the negative years with zero, you wind up with 40% more money. (source Jack Marrion Index Compendium.)
• In order to provide guarantees of principal and interest, fixed-indexed annuities usually place a cap on the gains of the product, on a year to year basis. Moderation one must accepts for the inherent guarantees. For example; 100% participation and cap of 9%, means that if the S&P 500 returned 12%, the annuity contract would receive a positive index credit of 9%.

Some advisors, who are not experienced with fixed-Indexed annuities, will still try and beat the market on your behalf. That is fine if you can accept the risk, and you can afford to lose a portion of your retirement nest egg that you choose to place in market sensitive investments.

Finally, fixed Indexed annuities will not give you all of the markets return, but they will not give you any losses either. This is the trade off. If you are willing to accept moderation, meaning a cap on upside earnings, then such moderation comes complete with safety of principal, plus all of your annual gains are locked-in and yours to keep! Fixed-Indexed Annuities may offer the moderation you need.

Take this time to ask yourself; "Is there a smarter way to build, protect, and preserve, retirement savings, other than utilizing a fixed-indexed annuity?"

Review the fixed-Indexed annuity questions below.

• Can your present investments prevent major losses in your retirement nest egg, before they ruin your retirement?
• Do your present investments allow you to participate in and lock-in, annual markets gains, but never participate in market losses?
• Do your present investments provide upside potential, with underlying guarantees of both principal and interest?
• Do your present investments provide income in retirement that you cannot out live?

When you ask yourself "Is the retirement savings or investment strategy I am currently using or considering, able to provide all of the benefits provided by the fixed-indexed annuity?" We think you will conclude that the answer is no! The only retirement savings product that will do all of this for you is a fixed-indexed annuity. That is why we say "Living Longer, Living Better, With Annuities".

Click here to learn more about the advantages of fixed-indexed annuities over mutual funds